UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
June 6, 1979
The MANES ORGANIZATION, INC. (Hampton Bays Division), Plaintiff,
STANDARD DYEING AND FINISHING CO., Defendant
The opinion of the court was delivered by: TENNEY
In this diversity action alleging breach of implied warranty and negligence the defendant asserts that the issue sued upon is referable to arbitration and applies for a stay of proceedings pursuant to 9 U.S.C. § 3.
The plaintiff is The Manes Organization, Inc. (Hampton Bays Division) ("Manes"), a New York textile company. The New Jersey defendant, Standard Dyeing and Finishing Co. ("Standard"), performs fabric dyeing, finishing and processing according to instructions from its customers among them Manes and ships the finished fabric pursuant to the customer's order.
This suit involves a contract for a particular lot of fabric which went from its "greige," or raw, unfinished state in Manes' hands to Standard for processing and then on to Manes' customer, L. W. Foster Sportswear Co. ("Foster"; the "Foster contract"). For this shipment Manes billed Foster $ 141,503.04, but Foster refused to pay, alleging defective processing. Manes began arbitration against Foster and sought to bring Standard into the same proceedings, which were to be held before the American Arbitration Association ("AAA") in New York City. Standard blocked that move by pointing out that its contracts with Manes contain an arbitration clause that specifically provides for the application of the Arbitration and Award Statutes of the State of New Jersey, not for arbitration before the AAA in New York.
Rebuffed in its attempt to compel Standard's participation in the New York arbitration, Manes began this action for breach of implied warranty and negligence in the fulfillment of the Foster contract. Subsequently, Standard moved in New York State Supreme Court for an order compelling arbitration not only of the Foster contract dispute, but of disputes arising from other contracts between itself and Manes. By Order dated October 24, 1978, Justice Schwartz of that court ordered arbitration over Manes' objections, and by further Order dated January 4, 1979, she heard Manes' reargument on the arbitration matter and adhered to her original ruling. The Manes Organization, Inc. (Hampton Bays Division and Fashionlooms Division) v. Standard Dyeing and Finishing Co., No. 12293/78 (Sup.Ct. Oct. 24, 1978 and Jan. 4, 1979), Exhs. to Letters dated Nov. 1, 1978 and Jan. 5, 1979 from Melvin Beinart, Esq., to this Court. The Court concludes that the decisions of the New York court are res judicata on this matter and that the civil action brought here by Manes must be stayed pending arbitration.
Res judicata applies if there has been a prior judgment on the legal or factual merits of the prior case and if the same cause of action between the same parties is being adjudicated in a second forum. Mitchell v. National Broadcasting Co., 553 F.2d 265, 268 (2d Cir. 1977). The test for determining whether causes of action are the same is whether a different judgment in the second action would impair or destroy rights or interests established in the first action, whether the same evidence proves the first and the second, and whether the essential facts and issues in the second were present in the first. Herendeen v. Champion International Corp., 525 F.2d 130, 133-34 (2d Cir. 1975). In this case there can be no question that the identical issues were raised by these parties in the New York State proceedings, and that Justice Schwartz has already ruled on the legal and factual merits of the case. It makes no difference that the New York State proceeding was one to compel arbitration under a contract while the action here is a damage claim arising from the alleged breach of the same contract. It is substance and not form that governs where res judicata is argued, and "repetitive litigation is not to be allowed simply because the claim bears new garb." Thistlethwaite v. City of New York, 362 F. Supp. 88, 93 (S.D.N.Y.1973), Aff'd, 497 F.2d 339 (2d Cir.), Cert. denied, 419 U.S. 1093, 95 S. Ct. 686, 42 L. Ed. 2d 686 (1974).
Reviewing the facts as they were presented to this Court, it appears that the disputed work was performed under a written form contract between the two parties. The Foster contract was dated July 21, 1977, and was one of 11 entered into by Manes and Standard between May 1977 and February 1978. Apparently the custom between the parties was to agree orally on a particular fabric finishing job and for Standard later to send to Manes the contract to memorialize the agreement. The same form was used in all 11 contracts. It provides on its face that
delivery to us (I. e., Standard) of your instructions relating to goods as described, whether received or not, or acceptance by you of delivery of any goods as described, or payment for processing in whole or in part shall constitute your assent and acceptance of this contract and of the terms and conditions On the face and reverse sides WHETHER OR NOT YOU HAVE RETURNED TO US A COPY OF THE CONTRACT SIGNED BY YOU.
Exh. B to Defendant's Order to Show Cause (italics the Court's; upper case in the original). This paragraph is located directly above the signature line on the face of the contract, and the reverse side contains the arbitration clause now invoked by Standard.
Standard maintains that a valid contract arose because Manes accepted according to the terms of the face of the contract by issuing instructions about finishing, by accepting delivery of the finished goods through designation that they be delivered directly to Foster, and by paying at least in part for its debt to Standard under the Foster contract. Manes denies none of this. Instead it argues to this Court, at least that the transaction between it and Standard was governed by Article 2 of the Uniform Commercial Code; that according to Code section 2-207 the arbitration clause on Standard's form contract was a material variance in the terms of the contract, and that absent proof of express acceptance of that "variance" by Manes, the arbitration clause was invalid. For the reasons set out in the margin the Court finds that the contract between Manes and Standard was for services and not for goods and, a fortiori, that Article 2 does not apply. Therefore, this theory whether or not raised in the New York court is dismissed as meritless.
Beyond the UCC argument, Manes urges another theory which was without question raised before Justice Schwartz. Manes alleges that it is not bound to Standard's arbitration clause because arbitration was never mentioned in the oral negotiations between the parties, because the Foster contract was never signed by Manes, and because the face of the contract form contains no explicit reference to the arbitration clause on the reverse side. In rebuttal, Standard argues that a valid contract arose from Manes' acts pursuant to the acceptance provision printed on the face of the contract form, and, in any event, that Manes is estopped from denying the validity of the arbitration clause because Manes itself relied on it when it sought arbitration of this dispute before the AAA in New York.
Plainly these are the same arguments that were raised by the two parties before Justice Schwartz, and her decision just as plainly reveals that she considered them in order to make that decision. In her October 24, 1978 Order she stated:
Manes contends that there is no enforceable agreement between the parties for arbitration. However, Manes is estopped to deny the validity of the arbitration provision, for when it served its own Demand for Arbitration upon Standard in May, 1978, it relied on the very arbitration provision it now argues is invalid.
October 24th Order at 2. See Exh. F. to Affidavit of Richard Knight, sworn to July 21, 1977 (Manes demands arbitration before the AAA Commercial Arbitration Tribunal of "a controversy which has arisen between it and (Standard) out of a written contract . . . dated July 21, 1977, Which provides for arbitration of all disputes." (Emphasis added)).
Seeking to escape preclusion, Manes makes the odd argument that a decision arrived at by a New York court cannot be res judicata in federal litigation concerning an issue within the scope of the Federal Arbitration Act ("F.A.A."). Because Manes offers no support for this theory the Court can only speculate that this assertion arises from a distorted view of the holding in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967). There the Supreme Court determined that a federal court must apply federal law to decide the validity of an arbitration clause where the transaction in dispute was within the compass of the F.A.A. The New York Court of Appeals construed Prima Paint to mean that "in an action brought in the Federal courts, which involves arbitration provisions in . . . interstate transactions, the F.A.A. overrides inconsistent provisions of arbitration acts of the several states." Matter of A/S J. Ludwig Mowinckels Rederi v. Dow Chemical Co., 25 N.Y.2d 576, 585, 307 N.Y.S.2d 660, 665, 255 N.E.2d 774, 778 (1970). ("Mowinckels "). The Mowinckels court then added its own corollary, I. e., that it is "wise, indeed necessary, that a litigant in a controversy governed exclusively by Federal substantive law be not permitted to come into (New York) courts Solely for the purpose of avoiding an arbitration directed and compelled under the Federal statute." Id. (Emphasis added). Obviously, no such purpose was evinced by Standard when it sued in New York court to Compel arbitration.
Where, as here, the issue of arbitrability has already been determined in favor of arbitration, there can be no reason to relitigate in the federal court in order to further a policy favoring what has already been done. Moreover, on any appeal there is very little danger that a New York judicial panel will misapply the New York Court of Appeal's holding in Mowinckels. Because it is absolutely clear that the cause of action to compel arbitration in the New York courts and the affirmative defense of arbitrability offered in this damage action are identical, this Court deems the New York action conclusive. The res judicata doctrine exists to serve "considerations of judicial economy and a public policy that favor(s) injecting certainty into the legal system . . . (through the avoidance of) repetitive litigation of the same causes of action." Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1232 (2d Cir. 1977). No meritorious reason exists here to circumvent those salutary goals.
The motion to stay the instant proceedings pending arbitration, 9 U.S.C. § 3, is granted.